What Is a Testamentary Account & How Does It Work?

A testamentary account serves as a financial arrangement for transferring assets directly to designated beneficiaries upon the account holder’s death. This mechanism operates outside the traditional probate process, which is the court-supervised procedure for validating a will and distributing an estate. Utilizing these accounts can streamline the transfer of specific assets, offering a more direct path for beneficiaries to receive funds or securities. The primary goal of establishing such an account is to facilitate a quicker and often more private distribution of assets, bypassing the complexities and delays that can be associated with probate.

Understanding Testamentary Accounts

Testamentary accounts function by allowing an account holder to name one or more beneficiaries directly on the account itself. This designation ensures that the assets held within the account automatically transfer to the named individuals upon the account holder’s passing. The account holder maintains full control over the assets during their lifetime, including the ability to withdraw funds, change beneficiaries, or close the account entirely.

The primary purpose of these accounts is to avoid the probate process for the specific assets they hold. Probate can be a time-consuming and often public legal procedure, potentially delaying asset distribution to heirs by several months or even years. By contrast, assets in a testamentary account can typically be claimed by beneficiaries much more swiftly, often within days or weeks of the account holder’s death. This direct transfer also offers a degree of privacy, as the details of the transfer generally do not become part of public court records.

Testamentary accounts are distinct from traditional wills and trusts. A will is a legal document that dictates how assets solely owned by the deceased and without beneficiary designations will be distributed through probate. Testamentary accounts, however, operate independently of a will, meaning the assets held within them are distributed according to the account’s beneficiary designation, regardless of the will’s terms. Similarly, they differ from formal trusts, which are separate legal entities established to hold and manage assets.

Types of Testamentary Accounts

Several common forms of testamentary accounts exist, each suited for different types of assets. These accounts are generally defined by their direct beneficiary designation feature, which facilitates the non-probate transfer of assets.

One prevalent type is the “Payable on Death” (POD) account, primarily used for bank deposits such as checking accounts, savings accounts, and certificates of deposit. With a POD designation, the account holder retains complete ownership and access to the funds during their lifetime, and the named beneficiary has no rights to the money until the original account holder’s death. Once the account holder passes away, the funds transfer directly to the named POD beneficiary upon presentation of the necessary documentation, typically a death certificate.

Another widely used type is the “Transfer on Death” (TOD) account, which applies to investment securities like stocks, bonds, and mutual funds held in brokerage accounts. Similar to POD accounts, the owner of a TOD account maintains full control over the investments, including the ability to buy, sell, or trade securities, and to change or revoke beneficiary designations at any time. Ownership of the securities passes directly to the designated beneficiary without requiring probate.

“In Trust For” (ITF) accounts, also known as Totten Trusts, represent another common type, particularly for bank accounts. These accounts are established by an individual who holds the funds “in trust for” a named beneficiary. While the account holder is alive, they are considered the trustee and have full access to and control over the funds. The ITF designation is revocable, allowing the account holder to change beneficiaries or close the account at any time. Upon the account holder’s death, the funds automatically transfer to the named beneficiary, bypassing probate just like POD accounts.

Establishing a Testamentary Account

Establishing a testamentary account is generally a straightforward administrative process handled directly with a financial institution. The initial step involves identifying the specific financial institution where the account will be opened or where an existing account will be converted. This could be a bank for a POD account or a brokerage firm for a TOD account.

Once the institution is identified, the account holder will need to complete specific forms provided by that institution. These forms require the designation of beneficiaries, which includes providing their full legal names, current addresses, and their relationship to the account holder. It is also advisable to name contingent beneficiaries, who would receive the assets if the primary beneficiary predeceases the account holder. This ensures a clear line of succession for the assets.

The account holder should accurately fill out all required fields on the forms, ensuring that beneficiary details are precise to avoid any delays or complications in asset transfer after death. Reviewing these beneficiary designations periodically, especially after significant life events such as marriage, divorce, or the birth or death of a family member, is a prudent practice to ensure they align with current wishes.

Implications of Testamentary Accounts

Upon the death of an account holder, testamentary accounts facilitate a relatively quick and efficient transfer of assets to the named beneficiaries. The process typically requires the beneficiary to present a certified copy of the account holder’s death certificate and their own identification to the financial institution. Provided the documentation is in order, the transfer of funds or securities can usually be completed within a few days to a few weeks.

A primary implication of these accounts is their ability to bypass the probate court system entirely. This means the assets held in POD, TOD, or ITF accounts are not subject to the public scrutiny, delays, and costs that can accompany the probate of a will. Avoiding probate can lead to significant savings in legal fees, court costs, and executor fees, which would otherwise reduce the value of the inheritance for beneficiaries. The private nature of these transfers also ensures that the details of asset distribution remain confidential.

Assets transferred through testamentary accounts are distributed outside the terms of a will. This means that even if a will exists and specifies a different distribution for these particular assets, the beneficiary designation on the account generally takes precedence. Therefore, it is important for account holders to ensure their testamentary account designations align with their overall estate plan. While these accounts avoid probate, the assets within them are still considered part of the deceased’s taxable estate for federal estate tax purposes. For individuals dying in 2025, the federal estate tax exemption is $13.99 million per individual.